Jaffna and Kilinochchi Water Supply and Sanitation Project (RRP SRI 37378) FINANCIAL ANALYSIS A. Financial and Operational Performance of NWSDB 1. The NWSDB was established in 1975 by an Act, and has a mandate to: (i) develop, operate, and control an efficient, coordinated water supply system and distribute water for public, domestic, and industrial purposes; (ii) establish, develop, operate, and control an efficient, coordinated sewerage system; (iii) take over and carry on any water supply or sewerage undertaking of any local authority transferred to the NWSDB either by a voluntary transfer order or by a compulsory transfer order; and (iv) supply water and distribute or sell water in bulk or otherwise to any local authority, government department, institution or organization, or any individual. 2. The NWSDB has a national network of water and sewerage operations with 11 regional support centers (RSCs), as well as the Colombo head office. The NWSDB’s operation includes 310 schemes, 1.27 million water connections, and an estimated 5.36 million people served, along with 9,000 staff. Responsibility and authority for day-to-day administration, planning, procurement, capital works, and operation and maintenance of the water schemes are devolved to each RSC. However, all water revenues go directly to the Colombo head office through nationwide banking network facilities. Funds are distributed to each RSC according to its needs and as agreed upon in the annual budget. The regional and RSC offices keep their own books of accounts, and the chief accountant at the respective RSC office forwards the financial reports to the head office where the financial reports, including balance sheet, income statement, and cash flow, are consolidated. The RSC offices do not consolidate accounts received from the regional offices under their purview. Adjustments for depreciation and loan service charges are incorporated only at the accounts consolidation stage and carried out at the head office. 3. As shown in Table 1, the financial performance of the NWSDB has continued to deteriorate in 2000-2009, resulting in an accumulated net loss of SLRs7.58 billion as of end- 2009. From 2002 to 2004, net losses of the NWSDB had averaged SLRs370 million per year. From 2005 to 2009 these losses escalated to an average of SLRs1.18 billion per year, mainly because of increasing operating expenses and debt service charges exacerbated by the low national water tariffs. Over the 10-year period, the NWSDB raised its national water tariff twice—effective March 2005 and February 2009. With the tariff revision, the corresponding rates were increased from SLRs1.25 per cubic meter (m3) to SLRs3.00/m3. This upward tariff revision resulted in a 160% increase in the average monthly water bill of a household, from SLRs75 per month to SLRs195 per month for 15 m3 of consumption. Largely because of this tariff revision, water sales revenue during 2009 witnessed a year-on-year increase of more than 43%, which enabled a marginal operating profit following a record loss experienced in 2008. However, the increased debt service charges resulted in an overall end-of-year loss of SLRs1.43 billion. Nonetheless, this loss represented 50% decrease compared with the loss in 2008. 4. The sewerage tariff has yet to be introduced. Hence, the sewerage operation is simply contributing to the NWSDB's net income loss. The sewerage schemes are limited to Colombo, the Dehiwala and Mt. Lavinia municipal councils, and the Kolonnawa urban council areas, with 10,435 connections maintained by the Greater Colombo Sewerage section and a more recent scheme in the Kandy city area. Under the project, a revised water tariff schedule and the introduction of a sewerage tariff schedule are proposed. Under the new schemes, tariff revenues will cover at least operations and maintenance (O&M) costs and debt service costs to ensure financial sustainability of the assets created. 2 5. Though the NWSDB’s financial performance has shown negative net incomes, its operational performance has shown promising if inconsistent improvement. While the NWSDB has failed to maintain a positive operating income (largely because of higher fuel and electricity prices), nonrevenue water levels decreased from 37.9% to 36.2% in 2008. The number of staff per 1,000 connections decreased from 8.92 in August 2005 to 7.16 in December 2009. The average bill collection rate has averaged more than 95%, and reached 99% in 2008 after a more efficient payment system and a more effective disconnection policy were introduced. A new payment incentive scheme involving penalty charges and early payment rebates also contributed to the improved bill collection rate. Table 1: Summary of Income and Expenditures for 2000–2009 (SLRs million) Item 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Sales of water 2,992 3,376 3,835 4,136 4,264 5,446 5,869 6,482 6,743 9,670 Other operating 447 634 768 728 645 814 1,075 1,129 1,391 1,397 income Total operating 3,438 4,010 4,604 4,864 4,909 6,261 6,944 7,611 8,134 11,067 revenues Less: Operating 2,929 3,621 4,491 4,585 5,317 5,894 6,753 8,241 9,865 10,972 expenses Operating income 509 389 112 279 (408) 367 191 (630) (1,730) 95 Add: Investment 213 250 210 136 97 33 106 203 60 49 income Less: Operating 501 481 461 550 525 492 512 852 1,193 1,569 interest Net income 221 158 (139) (134) (836) (92) (214) (1,278) (2,863) (1,425) attributable for the year Brought forward (976) (755) (597) (736) (870) (1,706) (1,798) (2,012) (3,290) (6,153) income (loss) from previous year Income (loss) (755) (597) (736) (870) (1,706) (1,798) (2,012) (3,290) (6,153) (7,579) carried forward Source: Jaffna Peninsula Water Supply & Sanitation Feasibility Study prepared under 2043/2044-SRI: Conflict Affected Areas Rehabilitation Project. This was further updated by Asian Development Bank. 6. The NWSDB has implemented several projects supported by ADB, the World Bank, and other development partners. As of December 2009, capital work-in-progress for NWSDB was valued at SLRs72.81 billion ($636.6 million). As of December 2009, the outstanding loan capital and unamortized capital grants received by the NWSDB were about SLRs89.09 billion ($778.8 million), of which 98% were foreign-funded (including five ADB-funded projects). Table 2: Subsidiary Lending Terms between the Government of Sri Lanka and the National Water Supply and Drainage Board Project Type Financing Mix Interest (%) Rate Loan Grant (%) Urban WSS 50 50 10 Rural WSS 15 85 10 Sanitation 0 100 Community WSS 0 100 WSS = water supply and sanitation. Source: Based on the Government of Sri Lanka’s explanation. 7. Following the subsidiary lending arrangements established between the Government of Sri Lanka and the NWSDB, the loans from ADB will be on-lent from the government to the 3 NWSDB in a mix of grant and loan. The grant and loan ratio will depend on the type of investment and is shown in Table 2. Under the project, the water scheme will provide water to both urban areas (i.e., areas under the purview of the JMC and the Chavachacheri urban council) and rural areas (i.e., Pradeshiya Sabhas). Hence, the investment for the water scheme is classified as urban or rural, based on the population in urban or rural areas. C. Activities of the NWSDB and Local Authorities 8. In the water supply subproject areas, NWSDB manages only 15 schemes, of which 12 schemes are operational with about 745 water connections. Unlike in the rest of Sri Lanka, a significant proportion (319, or 43%) of connections in the water supply subproject areas are standposts.1 These standposts are managed by community standpost groups in an agreement between the NWSDB and each group, whereby the group selects 4–5 officers to collect the bills due from other members of the group and transfers the money collected to the NWSDB. The NWSDB also provides water by bowsers,2 as piped water supply is not sufficient. The newly elevated north RSC of the NWSDB, located in Vavuniya District, is responsible for overseeing the operations of the two regional offices in Jaffna and Vavuniya districts, managing 12 small water schemes, and monitoring the water quality in five districts—namely, Jaffna, Kilinochchi, Mannar, Mullativu and Vavuniya. The north RSC—including its regional offices in Jaffna and Vavuniya districts—is staffed by 109 personnel. To handle the expanded services in the area and take up project implementation functions, the regional office in Jaffna District will take on additional staff and be upgraded through staff training, renovations of an administrative building, and procurement of additional office equipment and furniture. 9. The JMC manages two major and six minor water schemes with 460 household connections and more than 800 standposts, of which a large number are abandoned. Even though the JMC charges a higher rate than the NWSDB for 15 m3 of water, its cost recovery performance is poorer at 25% of O&M costs. This is mainly because the JMC does not charge for standposts. Other local authorities (i.e, urban councils and Pradeshiya Sabhas) also manage small water schemes and provide water by bowsers where piped water supply is insufficient. Many of these schemes suffer from lack of funds for maintenance, and facilities used in these schemes have deteriorated or were already abandoned. Some local authorities recover a portion of costs by collecting tariffs from consumer societies at the standpost level of SLRs5 per month, with a membership fee of SLRs100; others—in Arali North, Ponnalai and Vali West villages—charge SLRs30 per month per family for standpost connections.